Shanghai Volatility Spreads to U.S. as ETF Erases Gains for June

The largest U.S. exchange-traded fund tracking mainland Chinese stocks erased its gain for the month amid the widest price swings since January on concern the rally that pushed shares to a seven-year high is fading.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF slumped 5.1 percent to $47.81 on Thursday, putting it on track for the first monthly drop since January. The fund’s 30-day historical volatility climbed to 47 percent. The selloff followed another erratic session on the Shanghai Stock Exchange after traders sold shares purchased with borrowed money for a third day.

The broad price swings in Chinese stocks are driven by a clash between investors concerned that the soaring valuations are unsustainable and those who say China’s monetary easing will support further gains, according to Brad Gastwirth, chief executive officer of ABR Investment Strategy. The Shanghai Composite Index closed at a seven-year high on June 12, then capped its biggest weekly drop since the global financial crisis last week.

“I expect to continue to see a hefty level of volatility in the Chinese market and the ETF,” Gastwirth said. “We are seeing extraordinary levels of volatility based on concerns about a market that’s gone up arguably too quickly.”

Short interest in the A-share ETF rose to a record 19 percent of shares outstanding this week as the Shanghai Composite Index went from the world’s best-performing major benchmark following a year-long rally to the worst. Traders have pulled $286 million from the ETF this month, on track for the biggest outflow since the fund was created in 2013.

Margin Trading

The Bloomberg index of the most-traded Chinese stocks in the U.S. slumped 0.9 percent for the third loss in four days. The Shanghai Composite tumbled 3.5 percent at the close on Thursday, erasing a gain of 0.7 percent and snapping a two-day, 4.7 percent advance.

Margin traders reduced holdings of shares purchased with borrowed money for a third day on Wednesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling by 2 percent to 1.44 trillion yuan ($231.9 billion). That’s the longest stretch of losses in four months.

The Shanghai stock gauge has surged 124 percent in the past year on a record jump in margin debt and bets the government will lower borrowing costs. The measure is valued at 17 times 12-month projected earnings, down from a five-year high of 19.5 set this month, according to data compiled by Bloomberg.

The current slump is a “healthy pullback,” Geoffrey Dennis, the head of emerging-market strategy at UBS AG, said by phone. “The volatility in the ETF market is pretty healthy. It might frighten a few people off, but this is a liquidity-driven market representative of an economy that’s still growing.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE